China’s Influence on the Japanese Economy

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World’s Second Largest Economy Meets The Third

China’s Influence on the Japanese Economy

China and Japan has a long history and relationship together. From their beginnings, to cultural identities, economic advancements, history and even territorial boundaries, these two nations have been linked together for centuries.  As a matter of fact, the first mention of inhabitants living on the island of Japan comes from Chinese historical records that dates back to the first century A.D., as documented in The Book of Han. Before then migrants from China inhabited the islands, where new practices such as wet rice farming was developed. As the island population grew and developed many Chinese influences were seen, in terms of administrative practices, religion and cultural aspects. Even the earliest forms of Japanese literature, history books titled, Kojiki and Nihon Shoki and an eighth century poetry book titled Man’yōshū, or “Collection of Ten Thousand Leaves,” was written in primarily Chinese or a form called Man’yōgana.  As Japan’s language developed into its modern form, it still cannot escape its Chinese roots as even today’s modern Japanese language consists of kanji and kana.  Other relations include Japan’s legal system. Before the American and European influence from post- World War Two, Japan derived its legal system from Chinese law, influencing the Kujikata Osadamegaki of the Edo Period.  In short, Japan grew from Chinese migrants and its history is laced with Chinese influences if not outright replicas of certain practices or ideas. Since World War Two, China’s cultural impact has been felt less, as Japan was occupied by Western forces and the country, including its economy has grown into a unique identity of its own. However China’s influence is still felt in one significant component of Japan today. While Japan’s economy grew at rates of near 10% into the 1970’s, and it became the second largest economy on the planet, its economy still cannot escape the influence from China.  From their influence on Japan’s export levels, to its ability to produce, their impact on the Japanese Yen, and affecting their influential standing in the global economy, China is on the heels of Japan.  The actions of China directly affect Japan’s modern economy, as the long-time world’s second largest economy has reached a new stage in economic development.

Japan has in recent decades, specialized in manufacturing and exporting high quality electronics and automobiles for consumption. The production of these goods requires a large supply of certain materials called “rare earths.” Seventeen of these rare earths exist in nature, and they are some of the most sought resources used for manufacturing. Japan itself uses one fifth of the global supply, making it the number one importer of rare earths of any economy. While vital in the usage of electronic products such as hard drives and cell phones, Japan has a low internal supply of these materials, forcing them to import. The world’s largest exporter of these rare earths is China. Since 2006 China has cut export levels of these materials by 5-10% annually, decreasing supply and causing prices to soar. For certain resources such as cerium oxide, the price has gone up twenty times than its 2005 level. This comes as demand for these rare earths has drastically increased along with the demand for high-tech products. Demand is expected to go up another two thirds in the next five years. As the demand increases for Japanese high-tech products and China keeps decreasing supply to raise prices, Japan has nowhere else to turn, for China supplies 95% of the global demand, and is expected to remain as an acting monopolist for years to come. The quantities of the rare earths used in each product is small, making the marginal increase in cost small as prices go up, but the aggregate cost is substantial and will keep on increasing, leading to the need to raise prices on consumer goods to set marginal revenue equal to the higher marginal cost. China has themselves been increasing production of technology products and increasing exports. Their exported machinery and electronic products was up nearly 40% in the first half of the year from the previous year. With their exports increasing and being able to self- supply the rare earths needed to make such high-tech products, China is looking at the ability to make similar products as their Japanese counterparts, at a lower price, leading to a decrease in Japan’s export levels and a decrease in Japan’s trade surplus.

The trade balance is a deficit with China.

Trade surplus has drastically shrunk as involvement with China increases

As the trade balance has gotten smaller, Japan’s economy has taken a major hit. “The odds are that Japan may already be rolling into recession.  Consumption has been buoyed by spending incentives; they expire this month. The Kan government is preparing a new round of such incentives, but the experience of other economies shows that a second round of such incentives has much less impact. Most ominous is the trend in exports. Exports have led the Japanese economy over the last decade or so. It was almost a 50% decline in exports that took Japanese GDP down by a huge 8.9% from peak to trough in this latest recession. The rise in exports has accounted for 80% of the recovery since that trough which still has GDP 4.2% below the prior cyclical peak. The export data now shows a possibly significant outright downturn in exports already. This is striking because the world economy had still been recovering fairly strongly and Asia, led by 10% economic growth in China was still growing robustly.”

As shown, exports lead Japan’s economy, so to get growth going it needs solid export numbers. China’s government, however, has been implementing monetary  policy to intentionally devalue its currency, making it cheaper for countries to import/buy Chinese exports. The Japanese Yen has been increasing though, making Japanese exports more expensive, and giving Japanese business owners a reason to outsource their production platforms over to other nations for lower costs.

Japanese Yen value has an increasing trend line to the dollar from 1998 to 2010.

As Japan’s economy is heavily dependent on exports, the only reaction towards China’s devaluing policy will be to initiate monetary policies to weaken the Yen to remain competitive in the export market or lose shares in the global export market and continue to see decreasing economic growth or even slip into negative growth or a recession.  Therefore Japan’s currency levels are based on China’s actions.

While Japan’s economy has been shown to be affected by China’s actions through direct economic policy, they have also altered Japan’s standing in the world economic stage. Starting in 2005 China surpassed France in GDP, and has since then surpassed the United Kingdom and Germany, putting them temporarily in third with only Japan, the long- time holder of second place not far ahead. However, in the second quarter of this year, Japan was surpassed by China, putting them out of the second largest economy positioning they had held for decades.

While in dollar terms this simply states China’s economy consists of more valuation than Japan, but on global terms it gives them a new found sense of elevated status, while putting Japan down a peg. In many instance this will be symbolic, but in global councils on the economy China will be more likely to get a say, as they are larger and have been growing at 10% while Japan is stuck at near 0-3%. Therefore Japan’s economic standing has decreased on the global stage.

China has always had an influence on Japan. Whether it is in the nation’s original settling by migrants, in establishing the system of writing or law, developing literature and language, or adding religious and culture influences, China has always affected Japan in some way. As China’s economy continues to move up on the global stage, their impact on Japan’s economy is being felt. Whether it is through their export levels and ability to produce, to the valuation of their currency or their status among economies, China is putting its mark on Japan’s economy.


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